279 U.S.

716
49 S.Ct. 499
73 L.Ed. 918

OLD COLONY TRUST CO. et al.

v.
COMMISSIONER OF INTERNAL REVENUE.
No. 130.
Reargued April 15, 1929.
Decided June 3, 1929.

[Syllabus from pages 716-718 intentionally omitted]

Messrs. Arthur A. Ballantine and George E. Cleary, both of New York
City, for Old Colony Trust Co. and others.
The Attorney General and Mr. Alfred A. Wheat, of Washington, D. C.,
for Commissioner of Internal Revenue.
Mr. Chief Justice TAFT delivered the opinion of the Court.

We have before us for consideration two questions certified from the same
Circuit Court of Appeals, No. 130 and No. 129. They are presented upon
different statements of facts, and the cases reach the certifying court in different
ways, but the questions are so nearly alike that the certifying judges deemed it
convenient to present them in consolidated form. We prefer to separate the
questions, discuss and decide No. 130 first, and then consider No. 129.

No. 130 comes here by certificate from the Circuit Court of Appeals for the
First Circuit. The action in that court was begun by a petition to review a
decision of the United States Board of Tax Appeals. The petitioners are the
executors of the will of William M. Wood, deceased. On June 27, 1925, before
Mr. Wood's death, the Commissioner of Internal Revenue notified him by
registered mail of the determination of a deficiency in income tax against him
for the years 1919 and 1920, under the Revenue Act of 1918 (40 Stat. 1057).
The deficiency was revised by the Commissioner August 18, 1925. An appeal
was taken to the Board of Tax Appeals, which was filed October 27, 1925. A

hearing before the Board, April 11, 1927, resulted in a decision November 12,
1927. The Board approved the action of the Commissioner, and found a
deficiency in the federal income tax return of Mr. Wood for the year 1919 of
$708,781.93, and for the year 1920 of $350,837.14. The petition for review
was perfected December 23, 1927, pursuant to the Revenue Act of 1926,
283(j), and sections 1001 to 1005, c. 27, 44 Stat. 9, 65, 109; 26 USCA
1064(j), and 1224-1228, and rule 38 of the First Circuit Court of Appeals.
3

The facts certified to us are substantially as follows:

William M. Wood was president of the American Woolen Company during the
years 1918, 1919, and 1920. In 1918 he received as salary and commissions
from the company $978,725, which he included in his federal income tax return
for 1918. In 1919 he received as salary and commissions from the company
$548,132.87, which he included in his return for 1919.

August 3, 1916, the American Woolen Company had adopted the following
resolution, which was in effect in 1919 and 1920:

'Voted: That this company pay any and all income taxes, State and Federal, that
may hereafter become due and payable upon the salaries of all the officers of
the company, including the president, William M. Wood; the comptroller,
Parry C. Wiggin; the auditor, George R. Lawton; and the following members of
the staff, to wit: Frank H. Carpenter, Edwin L. Heath, Samuel R. Haines, and
William M. Lasbury, to the end that said persons and officers shall receive their
salaries or other compensation in full without deduction on account of income
taxes, State or Federal, which taxes are to be paid out of the treasury of this
corporation.'

This resolution was amended on March 25, 1918, as follows:

'Voted: That, referring to the vote passed by this board on August 3, 1916, in
reference to income taxes, State and Federal, payable upon the salaries or
compensation of the officers and certain employees of this company, the
method of computing said taxes shall be as follows, viz.:

"The difference between what the total amount of his tax would be, including
his income from all sources, and the amount of his tax when computed upon
his income excluding such compensation or salaries paid by this company."

10

Pursuant to these resolutions, the American Woolen Company paid to the

10

11

Pursuant to these resolutions, the American Woolen Company paid to the

collector of internal revenue Mr. Wood's federal income and surtaxes due to
salary and commissions paid him by the company, as follows:
Taxes for 1918 paid in 1919.... $681,169 88
Taxes for 1919 paid in 1920..... 351,179 27

12 decision of the Board of Tax Appeals here sought to be reviewed was that the
The
income taxes of $681,169.88 and $351,179.27 paid by the American Woolen
Company for Mr. Wood were additional income to him for the years 1919 and 1920.
13

The question certified by the Circuit Court of Appeals for answer by this Court
is:

14

'Did the payment by the employer of the income taxes assessable against the
employee constitute additional taxable income to such employee?'

15

The first point presented to us is that of the jurisdiction of this Court to answer
the question of law certified. It requires us to examine the original statute
providing for the Board of Tax Appeals under the Revenue Act of 1924, and
the amending act of 1926.

16

The Board of Tax Appeals, established by section 900 of the Revenue Act of
1924, tit. 9, c. 243, 43 Stat. 253, 336 (26 USCA 1211, note, et seq.), was
created by Congress to provide taxpayers an opportunity to secure an
independent review of the Commissioner of Internal Revenue's determination
of additional income and estate taxes by the Board in advance of their paying
the tax found by the Commissioner to be due. Before the act of 1924, the
taxpayer could only contest the Commissioner's determination of the amount of
the tax after its payment. The Board's duty under the act of 1924 was to hear,
consider, and decide whether deficiencies reported by the Commissioner were
right.

17

Section 273 of that act (26 USCA 1047) defined a 'deficiency' to be the
amount by which the tax imposed exceeded the amount shown by the return of
the taxpayer after the return was increased by the amounts previously assessed
or disallowed. There was under the act of 1924 no direct judicial review of the
proceedings before the Board of Tax Appeals. But each party had the
unhindered right to seek separate action by a court of competent jurisdiction to
test the correctness of the Board's action. Such court proceedings were to be
begun within one year after the final decision of the Board.

18

Section 274(b); 26 USCA 1049, note, provided that, if the Board determined
there was a deficiency, the amount so determined should be assessed and paid
upon notice and demand from the collector. No part of the amount determined
as a deficiency by the Commissioner, but disallowed as a deficiency by the
Board, could be assessed, but the Commissioner was at liberty, notwithstanding
the decision of the Board against him, to bring a suit in a proper court against
the taxpayer to collect the alleged deficiency.

19

On the other hand, by section 900(g); 26 USCA 1218, note, it was provided
that, in any suit brought by the Commissioner, or by the taxpayer to recover any
amounts paid in pursuance of a decision of the Board, the findings of the Board
were prima facie evidence of the facts.

20

By the Revenue Act of 1926, this procedure was changed, and a direct judicial
review of the Board's decision was substituted.

21

The act of 1926 also enlarged the original jurisdiction of the Board of Tax
Appeals to consider deficiencies beyond those shown in the Commissioner's
notice, if the Commissioner made such a claim at or before the hearing (section
274(e); 26 USCA 1048c), and also to determine that the taxpayer not only did
not owe the tax but had over paid (section 284(e); 26 USCA 1065, note).

22

The chief change made by the act of 1926 was the provision for direct judicial
review of the Board's decisions by the filing by the Commissioner or the
taxpayer of a petition for review in a Circuit Court of Appeals or the Court of
Appeals of the District of Columbia under rules adopted by such courts.

23

It is suggested that the proceedings before the Circuit Courts of Appeals or the
District Court of Appeals on a petition to review are and can not be judicial, for
they involve 'no case or controversy,' and without this a Circuit Court of
Appeals, which is a constitutional court (Ex parte Bakelite Corporation, No. 17,
Original, 279 U. S. 438, 49 S. Ct. 411, 73 L. Ed. , decided May 20, 1929) is
incapable of exercising its judicial function. This view of the nature of the
proceedings we cannot sustain.

24

The case is analogous to the suits which are lodged in the Circuit Courts of
Appeals upon petition or finding of an executive or administrative tribunal. It is
not important whether such a proceeding was originally begun by an
administrative or executive determination, if, when it comes to the court,
whether legislative or constitutional, it calls for the exercise of only the judicial
power of the court upon which jurisdiction has been conferred by law. The

jurisdiction in this cause is quite like that of Circuit Courts of Appeals in review
of orders of the Federal Trade Commission. Federal Trade Commission v.
Eastman Kodak Co., 274 U. S. 623, 47 S. Ct. 688, 71 L. Ed. 1238; Silver Co. v.
Federal Trade Commission (C. C. A.) 292 F. 752. There are other instances of a
like kind which can be cited. United States v. Ritchie, 17 How. 525, 534, 15 L.
Ed. 236; Interstate Commerce Commission v. Brimson, 154 U. S. 447, 469, 14
S. Ct. 1125, 38 L. Ed. 1047; Stephens v. Cherokee Nation, 174 U. S. 445, 477,
19 S. Ct. 722, 43 L. Ed. 1041. See, also, Fong Yue Ting v. United States, 149
U. S. 698, 714, 13 S. Ct. 1016, 37 L. Ed. 905.
25

It is not necessary that the proceeding to be judicial should be one entirely de

novo. It is enough that, before the judgment which must be final has been
invoked as an exercise of judicial power, it shall have certain necessary
features. What these are has been often declared by this Court. Perhaps the
most comprehensive definitions of them are set forth in Muskrat v. United
States, 219 U. S. 346, 356, 31 S. Ct. 250, 55 L. Ed. 246, where this Court
entered into the inquiry what was the exercise of judicial power as conferred by
the Constitution. There was cited there a definition by Mr. Justice Field in Re
Pacific Railway Commission (C. C.) 32 F. 241, 255, which has been generally
accepted as accurate. He said:

26

'The judicial article of the Constitution mentions cases and controversies. The
term 'controversies,' if distinguishable at all from 'cases,' is so in that it is less
comprehensive than the latter, and includes only suits of a civil nature.
Chisholm v. Georgia, 2 Dall. 431, 432, (1 L. Ed. 440); 1 Tuck. Bl. Comm.
App. 420, 421. By cases and controversies are intended the claims of litigants
brought before the courts for determination by such regular proceedings as are
established by law or custom for the protection or enforcement of rights, or the
prevention, redress, or punishment of wrongs. Whenever the claim of a party
under the Constitution, laws, or treaties of the United States takes such a form
that the judicial power is capable of acting upon it, then it has become a case.
The term implies the existence of present or possible adverse parties whose
contentions are submitted to the court for adjudication.'

27

In Osborn v. United States Bank, 9 Wheat. 738, page 819, 6 L. Ed. 204, Chief
Justice Marshall construed article 3 of the Constitution as follows:

28

'This clause enables the judicial department to receive jurisdiction to the full
extent of the constitution, laws and treaties of the United States, when any
question respecting them shall assume such a form that the judicial power is
capable of acting on it. That power is capable of acting only when the subject is
submitted to it, by a party who asserts his rights in the form prescribed by law.

It then becomes a case, and the constitution declares, that the judicial power
shall extend to all cases arising under the constitution, laws and treaties of the
United States.'
29

The Circuit Court of Appeals is a constitutional court under the definition of

such courts as given in the Bakelite Case, supra, and a case or controversy may
come before it, provided it involves neither advisory nor executive action by it.

30

In the case we have here, there are adverse parties. The United States or its
authorized official asserts its right to the the payment by a taxpayer of a tax due
from him to the government, and the taxpayer is resisting that payment or is
seeking to recover what he has already paid as taxes when by law they were not
properly due. That makes a case or controversy, and the proper disposition of it
is the exercise of judicial power. The courts are either the Circuit Court of
Appeals or the District of Columbia Court of Appeals. The subject-matter of the
controversy is the amount of the tax claimed to be due or refundable and its
validity, and the judgment to be rendered is a judicial judgment.

31

The Board of Tax Appeals is not a court. It is an executive or administrative

board, upon the decision of which the parties are given an opportunity to base a
petition for review to the courts after the administrative inquiry of the Board
has been had and decided.

32

It is next suggested that there is no adequate finality provided in respect to the

action of these courts. In the first place, it is not necessary, in order to constitute
a judicial judgment, that there should be both a determination of the rights of
the litigants and also power to issue formal execution to carry the judgment into
effect, in the way that judgments for money or for the possession of land
usually are enforced. A judgment is sometimes regarded as properly
enforceable through the executive departments instead of through an award of
execution by this Court, where the effect of the judgment is to establish the duty
of the department to enforce it. La Abra Silver Mining Co. v. United States,
175 U. S. 423, 457, 461, 20 S. Ct. 168, 44 L. Ed. 223. The case of Fidelity
National Bank & Trust Co. v. Swope, 274 U. S. 123, 132, 47 S. Ct. 511, 71 L.
Ed. 959, shows clearly that there are instances where the award of execution is
not an indispensable element of a constitutional case or controversy. In that
decision there are collected familiar examples of judicial proceedings resulting
in a final adjudication of the rights of litigants without it.

33

But, even if a formal execution be required, we think power to resort to it is

clearly shown with respect to the enforcement of the action of the courts here

involved by sections 1001 to 1005.

34

By the first, the decision of the Board of Tax Appeals rendered after the
passage of the act of 1926 may be reviewed by the Circuit Court of Appeals or
the District Court of Appeals, if a petition for such review is filed either by the
Commissioner or the taxpayer within six months after the decision is rendered.
The courts are to adopt rules for the filing of the petition, the preparation of the
record, and the conduct of the proceedings upon such review. The review is not
to operate as a stay of assessment or collection of any portion of the amount of
the deficiency determined by the Board, unless a petition for review is filed by
the taxpayer, or unless the taxpayer has filed a bond which when enforced will
operate finally to settle the rights of the parties as found by the courts.

35

By section 1002 (26 USCA 1225), it is provided in what venue the decision
may be reviewed. In section 1003 (26 USCA 1226), the Circuit Courts of
Appeals and the Court of Appeals of the District are given exclusive
jurisdiction to review the decisions of the Board, and it is declared that their
judgments shall be final, except that they shall be subject to review by the
Supreme Court of the United States, on certificate or by certiorari in the manner
provided in section 240 of the Judicial Code as amended (28 USCA 347), and
in such review the courts shall have the power to affirm, or, if the decision of
the Board is not in accordance with law, to modify or reverse the decision of the
Board, with or without remanding the case for a rehearing, as justice may
require.

36

By section 1004 (26 USCA 1227), the same courts are given power to impose
damages in any case where the decision of the Board is affirmed, and it appears
that the petition was filed merely for delay.

37

By section 1005 (26 USCA 1228), the decision of the Board is to become
final in respect to all the numerous instances which in the course of the review
may naturally end further litigation. In the provisions of these sections, the
legislation prescribes minute details for the enforcement of the judgments that
are the result of these petitions for review in the several courts vested with
jurisdiction over them. The complete purpose of Congress to provide a final
adjudication in such proceedings, binding all the parties, is manifest, and
demonstrates the unsoundness of the objection.

38

We have before us, however, for actual inquiry a case different from one just
considered in the regular course of a petition for review of a decision of the
Board, begun and decided all after the enactment of the act of 1926. It is one in

which the appeal to the Board of Tax Appeals had been taken, but the appeal
had not been decided by the Board before the passage of the act of 1926. That
presents what involves a troublesome exception or duplication in the procedure.
This occurs because of the last excepting clause of section 283(b) of the
amending act of 1926 (26 USCA 1064(b), which is as follows:
39

'If before the enactment of this Act any person has appealed to the Board of
Tax Appeals under subdivision (a) of Section 274 of the Revenue Act of 1924 *
* * and the appeal is pending before the Board at the time of the enactment of
this Act, the Board shall have jurisdiction of the appeal. In all such cases the
powers, duties, rights, and privileges of the Commissioner and of the person
who has brought the appeal, and the jurisdiction of the Board and of the courts,
shall be determined, and the computation of the tax shall be made, in the same
manner as provided in subdivision (a) of this section, except as provided in
subdivision (j) of this section and except that the person liable for the tax shall
not be subject to the provisions of subdivision (d) of Section 284.'

40

The provisions of section 284(d); 26 USCA 1065(d) are those which deny to
the taxpayer the power to bring any suit for the recovery of the tax after he has
adopted the procedure of appealing to the Board of Tax Appeals or to the
Circuit Court of Appeals.

41

By this last exception in 283(b), there seems still open to the taxpayers who
have filed a petition under the law of 1924 and have not had a decision by the
Board before the enactment of the law of 1926, the right to pay the tax and sue
for a refund in the proper District Court (paragraph 20 of section 24 of the
Judicial Code, as amended by section 1310(c), c. 136, 42 Stat. 311, U. S. Code,
title 28, 41; 28 USCA 41(20). Emery v. United States (D. C.) 27 F.(2d)
992, and Old Colony R. Co. v. United States (D. C.) 27 F.(2d) 994, hold that
the petitioner still retains this earlier remedy.

42

The truth seems to be that, in making provision to render conclusive judgments

on petitions for review in the Circuit Courts of Appeals, Congress was not
willing in cases where the Board of Tax Appeals had not decided the issue
before the passage of the act of 1926 to cut off the taxpayer from paying the
tax and suing for a refund in the proper District Court. But the apparent conflict
in such cases can be easily resolved by the use of the principles of res judicata.
If both remedies are pursued, the one in a District Court for refund, and the
other on a petition for review in the Circuit Court of Appeals, the judgment
which is first rendered will then put an end to the questions involved, and in
effect make all proceedings in the other court of no avail. Whichever judgment
is first in time is necessarily final to the extent to which it becomes a judgment.

There is no reason, therefore, in the case before us to decline to take

jurisdiction. See Bryar v. Campbell, 177 U. S. 649, 20 S. Ct. 794, 44 L. Ed.
926; Kline v. Burke Construction Co., 260 U. S. 226, 230, 43 S. Ct. 79, 67 L.
Ed. 226, 24 A. L. R. 1077; Stanton v. Embry, 93 U. S. 548, 554, 23 L. Ed. 983.
43

Second. The jurisdiction here is based upon the certificate of a question of law.
That is whether the payment by the employer of the income taxes assessed
against the employee constitutes additional returnable taxable income to such
employee. The certification of such a question by the Circuit Court of Appeals
is an invocation of the appellate jurisdiction of this Court and therefore within
the Constitution.

44

Third. Coming now to the merits of this case, we think the question presented
is whether a taxpayer, having induced a third person to pay his income tax or
having acquiesced in such payment as made in discharge of an obligation to
him, may avoid the making of a return thereof and the payment of a
corresponding tax. We think he may not do so. The payment of the tax by the
employers was in consideration of the services rendered by the employee, and
was again derived by the employee from his labor. The form of the payment is
expressly declared to make no difference. Section 213, Revenue Act of 1918, c.
18, 40 Stat. 1065. It is therefore immaterial that the taxes were directly paid
over to the government. The discharge by a third person of an obligation to him
is equivalent to receipt by the person taxed. The certificate shows that the taxes
were imposed upon the employee, that the taxes were actually paid by the
employer, and that the employee entered upon his duties in the years in
question under the express agreement that his income taxes would be paid by
his employer. This is evidenced by the terms of the resolution passed August 3,
1916, more than one year prior to the year in which the taxes were imposed.
The taxes were paid upon a valuable consideration, namely, the services
rendered by the employee and as part of the compensation therefor. We think,
therefore, that the payment constituted income to the employee.

45

This result is sustained by many decisions. Providence & Worcester R. R. Co.,

5 B. T. A. 1186; Houston Belt & Terminal Ry. Co. v. Commissioner, 6 B. T.
A. 1364; West End Street Railway Co. v. Malley (C. C. A.) 246 F. 625;
Rensselaer & S. R. Co. v. Irwin (C. C. A.) 249 F. 726; Northern R. Co. of New
Jersey v. Lowe (C. C. A.) 250 F. 856; Houston Belt & Terminal Ry. Co. v.
United States (C. C. A.) 250 F. 1; Blalock v. Georgia Ry. & Electric Co. (C. C.
A.) 246 F. 387; Hamilton v. Kentucky & Indiana Terminal R. Co. (C. C. A.)
289 F. 20; American Telegraph & Cable Co. v. United States, 61 Ct. Cl. 326;
United States v. Western Union Telegraph Co. (D. C.) 19 F.(2d) 157; Estate of
Levalley, 191 Wis. 356, 210 N. W. 941; Estate of Irwin, 196 Cal. for services,

even though entirely voluntary,

46

Nor can it be argued that the payment of the tax in No. 130 was a gift. The
payment for services, even though entirely yoluntary, was nevertheless
compensation within the statute. This is shown by the case of Noel v. Parrott
(C. C. A.) 15 F.(2d) 669. There it was resolved that a gratuitous appropriation
equal in amount to $3 per share on the outstanding stock of the company be set
aside out of the assets for distribution to certain officers and employees of the
company, and that the executive committee be authorized to make such
distribution as they deemed wise and proper. The executive committee gave
$35,000 to be paid to the plaintiff taxpayer. The court said (page 672 of 15 F.
(2d)):

47

'In no view of the evidence, therefore, can the $35,000 be regarded as a gift. It
was either compensation for services rendered or a gain or profit derived from
the sale of the stock of the corporation, or both; and, in any view, it was taxable
as income.'

48

It is next argued against the payment of this tax that, if these payments by the
employer constitute income to the employee, the employee will be called upon
to pay the tax imposed upon this additional income, and that the payment of the
additional tax will create further income which will in turn be subject to tax,
with the result that there would be a tax upon a tax. This, it is urged, is the
result of the government's theory, when carried to its logical conclusion, and
results in an absurdity which Congress could not have contemplated.

49

In the first place, no attempt has been made by the Treasury to collect further
taxes, upon the theory that the payment of the additional taxes creates further
income, and the question of a tax upon a tax was not before the Circuit Court of
Appeals, and has not been certified to this Court. We can settle questions of that
sort when an attempt to impose a tax upon a tax is undertaken, but not now.
United States v. Sullivan, 274 U. S. 259, 264, 47 S. Ct. 607, 71 L. Ed. 1037, 51
A. L. R. 1020; Yazoo & Mississippi Valley R. Co. v. Jackson Vinegar Co., 226
U. S. 217, 219, 33 S. Ct. 40, 57 L. Ed. 193. It is not, therefore, necessary to
answer the argument based upon an algebraic formula to reach the amount of
taxes due. The question in this case is, 'Did the payment by the employer of the
income taxes assessable against the employee constitute additional taxable
income to such employee?' The answer must be 'Yes.'

50

Separate opinion of Mr. Justice McREYNOLDS.

51

The Board of Tax Appeals belongs to the executive department of the

government and performs administrative functions-the assessment of taxes. The
statute attempts to grant a broad appeal to the courts, and directs them to
reconsider the Board's action-to do or to say what it should have done. This
enjoins the use of executive power, not judicial. The duty thus imposed upon
the courts is wholly different from that which arises upon the filing of a petition
to annul or enforce the action of the Interstate Commerce Commission or the
Federal Trade Commission.

52

I think the Circuit Court of Appeals was without jurisdiction.